Wall Street Reports Earnings This Week, And These Three Stories Could Be Game Changers

This week Wall Street's big investment banks will report on how
they did in Q4 2012, and while they won't be reporting the train
wreck numbers that made the financial crisis so... exciting,
there are a few stories to watch that could make a major impact
on the world of finance.

Morgan Stanley's earnings mean we'll get an idea of what bank CEO
James Gorman's "tough times mean change" philosophy is doing to
make his company more competitive. At Bank of America, it's time
to take a hard look at legal fees. And at JP Morgan, the London
Whale could take a bite out of CEO Jamie
Dimon.

First up, Morgan Stanley. Last week, the bank announced that it
would
axe 1600 jobs
starting today. Coming from James Gorman's firm, that
shouldn't surprise anyone. Sure, the mass layoffs of 2009 and
2010 seem to have abated, but Gorman has always been outspoken
about his belief that the business of banking is changing and
Wall Street has to change with it — it's adapt or die.

It doesn't necessarily look like investors are being reassured by
this tough talk. Morgan Stanley's
stock has been relatively flat for the last year having
crawled back from a serious beating starting in May after the
Facebook
IPO disaster (MS was lead underwriter).

Bottom line: We'll see if MS earnings reflect what Gorman thinks
about the new Wall Street.

Then there's Bank of America, where the story is still all about
cash and legal fees.

Back in October, CEO Brian
Moynihan declared victory over everyone who doubted whether
or not his firm could amass enough cash to build a strong balance
sheet.

“We’re going to officially declare victory on one of those
operating principles,” Moynihan said in the town-hall style
meeting. “The reason why is, we have the top capital in the
industry, the top liquidity in the industry.” People have stopped
asking if the bank needs more funds to absorb losses and now want
to know when investors will get the excess, he said.

Yes, after selling assets like crazy, after receiving a $5
billion cash injection from Warren
Buffett last year, Bank of America is ready to increase its
dividend.

Maybe. While Moynihan was sounding optimistic, bank analyst
Meredith
Whitney was raining on his parade. "This is going to be an
endless beat down for the banks in terms of legal claims,"
she told CNBC.

And what's most important about that, as
Fortune's Stephen Gandel pointed out after the bank agreed to
pay out an $11.6 billion settlement to Fannie
Mae last Monday, is that Bank of America has consistently
underestimated the amount of money it has to pay out in legal
fees... by a whole lot.

From Fortune:

...bank reserves, and in particular legal reserves, are murky.
Banks only give a total amount, and not what goes into that
calculation. It's the 'trust us' approach. And at least in BofA's
case, it's not clear investors should. Take the Fannie
settlement. BofA said it had not previously reserved for $2.7
billion of the deal. The bank is paying Fannie $11.6 billion, but
that includes buying back nearly $7 billion in loans. Many of
those loans may be worth as much as half of their original value.
So out of a roughly $7.8 billion deal (final cost), BofA had put
only 65% of the settlement aside. By that math, BofA's $16
billion reserve fund for these types of deals should really be
more like $24 billion.

In all, BofA had set aside $6.4 billion, or enough to cover just
55% of the cost of the all the legal settlements and losses the
bank announced on Monday.

Last quarter, Bank of America estimated its total Fannie losses
as $1 billion (obviously not enough), and part of their latest
settlement last week was adding $900 million more to its legal
reserves.

Then there's the suit AIG filed
this weekend. The insurer is suing the NY Fed just to find out if
they have a right to sue Bank of America for bad residential
mortgage-backed securities it bought from Countrywide before the
financial crisis.

The last story to watch is at JP Morgan.
This weekend Bloomberg reported that the bank is circulating
a report that blames CEO Jamie Dimon for the bank's massive $6.8
billion "London Whale" trading loss last year.

The board will decide whether or not to release that report to
the public today. For his part, Dimon has said he wants to
"let it all hang out."

Still, this would be a fall from grace for Dimon. He's widely
considered the most competent banker on Wall Street, and he's
definitely the highest paid. He received $23 million total pay in
2011, including a $4.5 billion cash bonus. The board has already
decided that his bonus will be cut this year because of the
trading loss.